Today we have an in-depth new recommendation from Tom Bishop’s BI Research. This company builds and services infrastructure for the electricity, oil and gas and telecom industries, and is currently seeing increasing demand from all of them.
“In Q2, Quanta Services, Inc. (PWR, $24) grew revenues 58% and adjusted net income by 107%. That’s quite a feat for a company of this size. So what’s up with that? Here’s what I found out.
“North America is in the midst of a multi-year infrastructure investment cycle, particularly for electric and pipeline infrastructure, and Quanta Services is well positioned to benefit from this. The North American electric grid, after suffering from many decades of underinvestment, growing demand and changing needs will require a tremendous amount of investment over the next decade. The grid is a patchwork of networks not built for today’s use. More than 30% of infrastructure is beyond its useful life, another 30% is close. There is poor intercomnection between grids and very little redundancy. The company estimates there are 260,000 miles of transmission lines in planning in the U.S. and Canada. ... That’s a lot of work and this is Quanta’s specialty. In 2011, the company was awarded a record amount for new transmission contracts.
“Moving upstream, with the price of natural gas as cheap as dirt (almost), many electric utilities are switching to natural gas for power generation, providing a wide range of gas turbine power projects to Quanta’s Power Generation division. ... It is estimated that we’ll need 400,000 miles of additional gathering systems and 35,000 miles of additional transmission pipe-lines just for natural gas over the next 25 years. Near term, spending on ‘wet’ shale play pipelines in 2012 is estimated at $6.5 billion, up from $3.8 billion in 2011, with another $8.8 billion expected to be spent in 2013. ... Also, it is estimated that 30% of pipelines are beyond their useful life, government regulations are getting tougher and pipeline testing is becoming an increasingly big market. The natural gas pipeline industry alone is estimated to spend $6 billion a year on pipeline safety, testing and maintenance. In all, ICF International estimates that $108 billion will be spent on gas and oil pipeline infrastructure this decade. And Quanta is the leading solutions provider, with complete turnkey services from engineering and technical services to construction.
“The balance of Quanta’s revenues come from telecom (9%) and from licensing fiber optic cable (2%). With the advent of the 3.5G and 4G/LTE network and smartphones and what have you, Cisco recently estimated that U.S. mobile traffic would grow from 45 petabytes per month in 2010 to 915 petabytes per month by 2015 (20X). And that’s going to take some serious infrastructure. In this field Quanta can do it all, from wireline to fiber to cellular. ...
“While in recent years, some of Quanta’s markets have been up and some down, this year they’re all up. After doing $3 billion in 2011, the Electric Power segment had a backlog of $5 billion heading into 2012; the natural gas and pipeline business did $1 billion in 2011 and had a backlog of $1.35 billion heading into 2012. And telecom did $457 million in 2011 and entered 2012 with a backlog of $530 million. As of June 30, 2012, the backlog totaled $7.3 billion. After growing revenues by 18% in 2010 and again in 2011, Quantas sees 30% growth for all of 2012, to $6 billion, with more to follow. The balance sheet is strong, with $173 million in cash plus $487 million available on its credit facility vs. just $39 million of long-term debt. ... Q3 results are due out in early November with $0.36 projected vs. $0.25 last year. As is often the case with our larger cap selections, (added to the portfolio in part to offset the volatility of some of are other higher risk/higher return selections) the BI Ranks is healthy but less lofty 8.7. A Buy to $26.”
- Tom Bishop, BI Research, October 17, 2012